Moody Blues: European Drugmakers’ Credit Ratings Likely to Decline

The problems facing the drug industry are likely to make European drug makers a bit less creditworthy in the coming year and a half, Moody’s says in a report out today. The ratings agency issued a negative outlook for the sector, which includes Roche, GlaxoSmithKline, Sanofi-Aventis, AstraZeneca, Novartis and a few others.

The basic problem — all together now — is the companies’ pipelines of experimental drugs aren’t strong enough to make up for revenue that will be lost to looming patent expirations. For AstraZeneca, for example, “patents expiring over the 2010-2013 period represent sales of about $12 billion – compared to total sales of $29.6 billion in 2007,” the report says.

A tough U.S. regulatory environment that makes it harder to get new drugs to market adds to the worries.

From the point of view of the industry’s creditworthiness, another concern is big pharma’s habit of dropping lots of cash on biotech companies that don’t produce much revenue (at least in the short term). Stock buybacks, a favorite of shareholders, also make credit agencies nervous.

Since July of last year, when Moody’s put out its last report on the subject, there have been no upgrades and four downgrades, largely because of big acquisitions (in the case of AstraZeneca and Novartis) and share buybacks (GlaxoSmithKline).

Nevertheless, the sector’s credit remains in pretty good shape. As the report notes, the “industry remains profitable, with robust cash-flow generating ability and solid liquidity. Prospects for growth remain good as well, with remaining unmet medical needs as well as an aging population in key markets.”